This article, from Marketocracy Master Eugene Groysman, dissects two high dividend stocks, American Capital Agency Corp. (AGNC) and Annaly Capital Management (NLY), in an informative piece to the financial workings of these stocks and how these high dividend stocks can prove to be a good asset to an investor’s portfolio in the long term.
Eugene is the principal behind Windsor Asset in the greater Milwaukee area. He began his model portfolio with Marketocracy in late spring of 2003 after spending time as a lobbyist on Capitol Hill. His EMF portfolio has done impressively well over the past eight years, with an average annual return of 21.3%. In contrast, the S&P 500 has returned just 5.7% annually. You can view his track record here.
You can view Eugene's top 5 holdings, learn more about his strategy, and track his progress with monthly Performance Insights emailed directly to you at the end of each month.
Investors seeking long term value, or return, have been as elusive as finding a bank willing to loan a mortgage to an individual with a credit score below 720. The market has been reacting to news from Washington or the Euro Zone, leaving fundamental company analysis completely out the window. The recent performance of the market would have been worse had it not been for the old, boring dividend paying companies. Dividend paying companies produced all of last year’s 2.1% return and made positive economic contributions for all of the 2000s.
This, I am sure, came as a shock to Baby Boomers who were accustomed to stock dividends, in the 1990s, paying 2.8% versus rallying stock prices of 15.3%. It should come as no surprise to see investors seeking stable, less risky ground in the market through cash rich, yield paying companies. The demand for stable dividend payers is supported by various demographic trends, including the recent increase of nearly 7,000 Baby Boomers turning 65 years old every day, seeking ways of earning income that can keep pace with inflation. The traditional approach to preserve capital, through clinching on to cash or buying government bonds, seems quixotic with interest rates near zero and treasuries plummeting into fresh hell.
Non-emotional investors, seeking to earn money in a far from normal market, need to look at ways that vary from traditional investing methods. Purchasing high dividend stock is one way of earning income in this economic climate. When purchasing high dividend stock, do not look just at a few percentage point gains, but stocks that pay in the double digits. As a smart investor, you would still need to be extremely careful in choosing what to stocks to invest in by looking at the various factors, including the entire stock history, or whether the dividends have been paid out.
American Capital Agency Corp. (AGNC). American Capital Agency Corp. operates as a real estate investment trust (REIT). It invests in residential mortgage pass-through securities and collateralized mortgage obligations, for which the principal and interest payments are guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The company funds it’s investments primarily through short-term borrowings, that are structured as repurchase agreements. It has elected to be taxed as a REIT under the Internal Revenue Code of 1986. As a REIT, the company would not be subject to federal income tax, provided it distributes at least 90% of its taxable income to its shareholders. The current yield is about 19.00% or $5.60/share, which is not only enormous, but helps protect the downside of the investment. For example: a $10,000 investment in AGNC would earn at this yield, $2,000 per year, which can be taken as cash, or reinvested back into the position to buy more shares. As long as the div/share stays around this level, and at worst the position didn’t move, and all div were reinvested, in a five year time frame it would be worth more than $24,000. For a mortgage REIT, the most important measure to follow is a company's interest rate spread. This is the difference between the rate the company borrows money and the rate it lends out money. American Capital Agency's interest rate spread, while declining, is still very high and will likely remain so until interest rates begin rising again. The Federal Reserve, as has stated, won’t raise rates until 2014 at the earliest. You still have time before this happens. The short term rates will stay this low until at least late 2014, and some Fed Governors (6 of them, actually) believe it will be even longer. We also have an inflation target for the first time ever, which of course will give all of us the Fed guidelines as to when they might actually raise interest rates. AGNC has shown nothing but growth since its beginnings. The company pulled in profits of $35 million in 2008 followed by $119 million in 2009 and $288 million in 2010. While the company is only three years old, I still think that this is a solid buy for the long haul due to the fact that it has already established consistency and profitability in such a short period of time.
Annaly Capital Management (NLY): a real estate investment trust that engages in the ownership, management, and financing of investment securities portfolios. The company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans. Annaly Capital also invests in Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association debentures. As long as the interest rate spread doesn't begin to contract, then the company should be able to maintain its 13.9% dividend yield. At the moment, economic conditions for Annaly are quite favorable, and the Fed's recent pledge to hold interest rates near zero through 2014 suggests that conditions are unlikely to change for the near future. Still, investors need to keep an eye on the interest rate spread just to be safe. Currently, NLY is trading at $16.85, which is about $1.15 less than one year ago. However, with its 13.9% yield or $2.28/share, this would be good play in an ever volatile market, but keep a sharp eye on earnings. Should they waver, any investor should make a quick escape.
Since investors are taking on the risk, why not offset that risk with some double digit dividends? Why not get paid for buying stock in a company? High dividend investing stems from investors interest in looking to maximize income and possible capital appreciation. However, they need to understand that there are inherent risks involved when taking on dividend stocks, such as cuts or the elimination of the dividend altogether.
In this column, I bring you investing strategies from the best investors I have tracked at Marketocracy.com. You can view Eugene Groysman's top 5 holdings, learn more about his strategy, and track his progress with monthly Performance Insights emailed directly to you at the end of each month.
Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
